Year-on-year inflation, as measured by the wholesale price index, leapt to 7.31 per cent

RELATED ARTICLES Students train egg missiles on Montek to protest inflation Action may shift to second-line mid-cap stocks Inflation falls to 9.97% in July Moderating prices pull down inflation to single-digit at 9.97% Govt making every effort to control high inflation: PM

in December from 4.78 per cent in November, thanks mainly to rising food prices.

A silver lining comes, though, in the shape of the retail food price index, which shaded to 17.82 per cent in the week ended January 2 from 18.22 per cent a week earlier. However, that could not be much consolation, considering the index for food articles rose by 19.17 per cent in December.

The rise in overall inflation clearly reflects the pressure of food prices and other primary articles that have a weight of 22 per cent in the index, according to Rupa Rege Nitsure, chief economist at Bank of Baroda.

Latest data indicate a rise in industrial output, which has so far seen no discernable spillover of food inflation. “But sooner rather than later it will happen through the linkage between food prices and wages in the manufacturing sector,” she says.

Worse, rising prices of farm inputs and intermediates are feared to increase manufacturing costs. It bodes ill for inflation.

For now, however, the bulk of the core manufacturing sector has seen either a fall or a small increase in prices, according to Amit Mitra, Ficci secretary general. He sees inflation building up in a narrow segment of primary articles. Nevertheless, data show the index for primary articles was up by 14.88 per cent in December (11.15 per cent a year ago).

Mitra says inflation data clearly indicate where the government must act: the supply side. There are distribution problems because of deficiencies in storage and transportation even of commodities whose production has been good. “So, the answer is supply augmentation,” he says, reiterating the industry position against tightening monetary policy to combat inflation.

What Mitra said about primary articles is visible in the automobile industry where costs have gone up, forcing most companies to raise prices. The cost rise is mainly on two fronts: 1) borrowing money to run auto factories has become expensive and 2) steel, copper and aluminum and other basic inputs too have become costlier. An allied reason is consumer hesitation. “So auto prices are bound to go up further,” says Shashank Srivastava, Maruti’s chief general manager for marketing.

The worst news still comes from sugar, a commodity whose wholesale prices rose by 53.98 per cent in December (14.51 per cent a year ago).

From here where is inflation headed? Opinion is divided. Atul Chaturvedi, chief executive officer of Adani Wilmur, a retailing company, believes the worst is over and food inflation should start to taper, bringing down the overall inflation in tandem.

But Deepali Bhargava, chief economist at ING Vysya Bank, is not optimistic. She says the overall inflation will continue to rise till March, a view that the government Intelligence Bureau holds. She thinks inflation will creep up to 9 per cent as manufacturing also gets caught up in the spiral.

At that point inflation will reverse but still be above the RBI’s projection of 6.5 per cent in the first half of 2010, she says, warning, though, that if fuel retail prices are increased, its impact will be huge.

Despite Mitra’s -- and industry’s – insistence that money availability should not be curtailed to fight prices, some believe excess money in the system is one big push for prices.

Banks, they say, park Rs 65,000 crore to Rs 70,000 crore of idle money on a daily basis with RBI. On top of that, foreign institutional investors brought in a net $21.50 billion between April and December. There is too much money in the system and this is bound to increase inflationary pressures, they say.

Whether or not RBI heeds them will be seen on January 29 when it will make public a review of the money policy.